Tax exemption can be defined for the purposes of this essay as a situation when a certain group, usually those who have a low income in proportion to the rest of the country, are exempt from taxation. Tax exemption occurs in tax havens where people are not subject to any tax no matter their income or capital gains. In other countries tax exemptions may relate to the level of income so the tax residents with lower incomes such as those on benefits are generally not taxed. Overall, I believe that tax exemptions are beneficial as they create many economic benefits such as retention of more high skilled workers, decrease in income inequality and can also lead to improvements in development. Although there can be some negatives, tax exemptions can have many positive consequences for countries, if they can afford to do so.

Portugal has recently proposed the introduction of a progressive tax scheme where in the first year of work, young people are 100% exempt from taxation and then this value decreases for their respective second, third and fourth years of work. It was proposed by the right wing government under Montenegro, the prime minister, with the aim of retaining more young people and skilled workers who want to earn more money. The scheme aims to remove the “brain drain” of young Portuguese leaving the country and allows for the retention of more young talent. This is likely to have a positive impact on the economy as it means that with more skilled workers the quality of labour is likely to increase. Such increase may lead to more productive population and result in firms being able to lower their cost of production thus passing on lower prices to consumers. This has many positive benefits for the economy including becoming more internationally competitive which then leads to the country gaining more export revenue, reducing the current account deficit and causing growth. This can also mean that people's incomes are likely to increase in the long run so fiscal drag occurs and the government receives more tax revenue to make up for that loss from the scheme. This increase in revenue can also come from indirect taxes such as VAT as with people having more income they are likely to consumer more.  There may also be an attraction from people abroad to come and start a family in Portugal as they know that when their children begin to work they will be exempt from tax and will have an easier financial start to adulthood than in another developed country with high tax rates, such as the UK. t can also attract those young people who left Portugal to get a job in the UK or EU. Whilst the gross pay may be lower, the net salary may be competitive to the pay outside Portugal with the added benefit of lower cost of living, nicer environment and their home culture. Having more migrants from foreign countries can have negative effects such as a greater burden on public services and expenditure. In addition, there has been a lack of affordable housing in Portugal , exacerbated by deregulation within the country, leaving young people, and those buying houses, suffering. With more people in the country, there could be higher demand for houses leading to a surge in the prices making them inaccessible to some people, especially those on low incomes. However, migration has been welcomed by the country due to the high level of people leaving the country so in the short term the effects are likely to be positive.There is also an increasing ageing population in Eurpoe with fertility rates dropping low. This means more young workers are needed to keep the productiy of the workforce hgih so there is enough recources produced to meet the needs and wants of the current population. To entice people,  Portugal has created a ‘golden visa’ that allows expats to buy a house in Portugal for a price above 500,000 Euros in exchange for a resident permit and has introduced low tax rates for foreigners who want to live in Portugal. This can have a positive impact on Portugal but whether the scheme will work and be sustainable in the long run is up for debate.

Tax exemption can also be beneficial if it aids those who are in the lowest tax bracket or in relative poverty. This means that low income earners are able to retain more disposable income and thus be able to afford necessities as well as other luxury goods. With an increase in consumption this can lead to many positive benefits on the economy such as economic growth. With those on a lower income retaining a larger proportion they are less likely to remain in relative poverty and thus the government does not need to spend as much on ensuring they have enough money to survive through benefits. Retention of income can also lead to an increase in savings which benefits pension funds, banks and building societies. In turn they can use this money to  invest into capital and research in local businesses.

However, one may argue that tax exemption is unfair, especially for those on higher income/those not exempt. Everyone deserves to be treated equally and not discriminated against, in this case being forced to pay tax when others are exempt is on its face unfair. Despite the current system of tax brackets already presenting an ethical issue as some have to pay more, allowing a larger proportion of people to not pay tax can be seen as unfair as these people are benefiting from the positives of taxation, without contributing themselves. For example young people benefit from an increase in funding going towards schools as they receive higher quality of teaching and better resources in the classroom. However, once they have left school they do not immediately pay back to the government but instead those who are older and may not have benefited from this better quality education, have to pay instead. Socialists believe that all people in society should be equal so can this system of taxation be seen as going against their ideology. Whilst this is true to an extent, with the rich aiding the poor and those who do not have as much income as others, they are helping spread out their wealth to reduce inequality. This progressive tax system generally works as it can lead to equality being created instead of hindered, as long as the rate of tax is not too high for the rich as it may discourage them from improving an earning more as they may feel it is simply not worth it, which has a greater wider impact on the economy.

Overall, tax exemptions can be beneficial to countries such as Portugal through the improvement of economic and social issues such as inequality and economic growth. However, this system may only be beneficial in the short run and this depends upon whether the country is developing or developed. Developing countries are likely to have a high debt to GDP ratio and receive low levels of taxation overall due to rich people emigrating to other countries where their prospects are higher. Thus allowing tax exemptions for a large group of income earners in the short and long run, may mean that the government is likely to struggle to fund necessary public services such as healthcare as they lack the tax revenue meaning that development worsens. Developed countries, on the other hand, are likely to have more money so they can afford to allow for a reduction in taxation in the short run.